A new focus

At long last governments in Canada are beginning a new focus, spending on infrastructure development.

Sorely needed are underground pipe and sewage facilities, hydro wiring, bridges, tunnels, and, for example too, the Gardiner Expressway in Toronto; they are the tip of the iceberg as so such desperately needs attention.

In the most recent Ontario provincial election the Liberals referred to the need to allocate more spending on infrastructure, but no plans were formulated. Still, the wisdom of investing in infrastructure seems self-evident. Furthermore, research generally turns up a positive relationship between such spending and economic growth. That is especially appropriate now as our sluggish economic recovery needs an engine to improve: some stimulation.

It must be acknowledged that it is difficult to determine the precise effect on growth. Investment usually gives an immediate lift to GDP; much needed right now, it works in many ways. It can generate a rise in incomes from the additional workers. It also reduces transaction cost, promotes trade and fuels an increase in building facilities. This improves productivity.

Thus, it would increase growth dramatically, notably in areas where infrastructure has been so woefully neglected.

The return on any investment may fall, for example, as an alternative subway line is built, or if a new enterprise in a different location makes some plans less desirable. Increasing sprawl may make an entire project less attractive.

Finally, the design of infrastructure clearly matters. In a paper published by Brown University last year, several researchers looked at roundabout roads, so popular currently. Ring roads seem to exercise a magnetic pull on business, for reasons that seem obscure. They may mean more decentralization.

What is paramount is the financing of infrastructure spending. The public objects to new taxes and rising government indebtedness puts a damper on borrowing to finance projects.

The 1930s provide us with an innovation approach. Under the Roosevelt New Deal, a lend-spend program started in the depths of the 1937-38 recession. Government projects were funded over the long term by toll roads and user fees of all kinds, such as tickets to the theatre and concerts.

Short-term interest rates are at historic lows, so the longer-term prospects of repayment by means of a lending program should suffice. Too, wage levels with continue to be restrained because of the pressure from undeveloped countries.

None of this undermines the view that infrastructure spending is good for long-term growth. It is a salutary step for the nation’s economy and adds to the nation’s wealth.



Bruce Whitestone